Stanger Report Slams Proposed ARC—Retail Centers of America/American Finance Trust Merger

January 11, 2017 | by James Sprow | Blue Vault

In a Special Report released January 3, 2017, Robert A. Stanger & Co. presented a multi-faceted critique of the proposed merger of two nontraded REITs, ARC – Retail Centers of America (RCA) and American Finance Trust (AFIN). The Report provided numerous reasons for shareholders to reject the merger proposal to be voted on February 13, 2017. 

The terms of the proposed merger, if approved by a majority of shareholders of both companies, would provide the shareholders of RCA with 0.385 shares of AFIN and $0.95 in cash per share. Using the NAV per share for AFIN announced by its board on March 18, 2016 of $24.17, the merger consideration would represent $9.31 in the estimated NAV plus $0.95 cash, or $10.26. Of course, this value represents only $0.95 in cash and, if the merger is approved, shareholders would not have full liquidity for their AFIN shares until the shares are listed. There is no assurance that the shares would trade at the reported estimated NAV, and might trade at a much lower price. The shares of AFIN have been approved for listing on the NYSE and the Company intends to list its shares, subject to the company being in compliance with all listing standards, after completion of the proposed merger.

The question that RCA shareholders must answer for themselves prior to voting on the merger is simply, “Do the merger terms represent a fair value for RCA shares and does the opportunity for liquidity via the listing of AFIN shares represent the best method of achieving liquidity compared to other possibilities?”

Stanger’s Special Report casts doubt on the merger for the following reasons:

1. The portfolios of the two REITs, while both focused on retail, are decidedly different. AFIN owns 459 single tenant net leased properties with an average cost of $4.8 million.  RCA’s portfolio consists of 35 power and lifestyle centers with an average cost of $36 million. The report states that RCA has lower leverage (34.7% vs. 48.6%*), lower debt cost (2.73% vs. 4.76%*) and better MFFO cash distribution coverage (1.64x vs. 0.82x over the trailing 12 months*) than AFIN.
   * data from BVP’s NTR Industry Review Q3 2016
2. RCA has the potential to increase shareholder value significantly and make additional acquisitions, under the active management of Lincoln Property Company, a leading real estate investment and property manager.
3. The RCA Special Committee did not adequately consider an all-cash transaction with a third-party buyer or merger with an independent, publicly-traded company.
4. Even though AFIN has announced plans to list its shares, it does not mention that retail REITs are currently trading at a 12% discount to net asset value. In addition, the declared NAV of AFIN shares exchanged for RCA shares could be as low as $8.58 per RCA share, given the midpoint valuation set by UBS as investment bankers to AFIN.
5. There is no assurance given that Lincoln Property Company will continue to manage the RCA portfolio and AFIN’s advisers appear to have limited experience with lifestyle center portfolios.
6. The merger would move RCA investors to an external-advised REIT with a 20-year, virtually non-cancellable management agreement with AR Global. This agreement could reduce the valuation of AFIN shares and has an internalization fee included that could exceed $110 million.
7. RCA shareholders are also asked to vote to eliminate investor protection provisions in the RCA charter that make it more difficult to change the management agreement.
8. The Bank of Montreal (BMO) that represents RCA in the merger appears to have significant conflicts of interest, having represented Global Net Lease II when it merged with Global Net Lease, involving a conflicted interest and the same 20-year contract with an AR Global entity. The fees to be paid to BMO and AFIN’s representative UBS aggregate to over $9.6 million and are conditioned on the completion of the merger, presenting a clear conflict of interest between the investment bankers and RCA shareholders.
9. The proxy for the merger does not disclose any implications related to the indictment of an officer and purported partner of AR Global and possible ongoing investigations of the firm and/or its officers or owners. The proxy does not consider the impacts these factors might have on the valuation of AFIN shares if it continues with AR Global as its advisor.
10. In a typical roll-up transaction, the sponsor is required to pay failed deal costs. However, RCA shareholders must shoulder the estimated $10 million or higher costs of a rejected merger, representing a failure of the RCA Special Committee to protect its shareholders.
11. The RCA Special Committee should have taken into consideration the failure of the New York REIT merger involving JBG Cos. proposed by AR Global, which was rejected by shareholders as “too conflicted, too self-serving and significantly mispriced.”

These criticisms contained in The Stanger Report’s Special Report of January 3, 2017 raise serious questions that shareholders must consider, and point to numerous disturbing hints of conflicts of interest and self-serving by the boards of the two REITs. The Chairman, President and CEO of RCA, Mike Weil Jr. is also the Chairman, President and CEO of AFIN, and is the CEO of AR Global. Isn’t that reason enough to question the objectivity with which the benefits to shareholders of the proposed merger have been evaluated?

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